Chapter 7: GDP and CPI: Tracking the Macroeconomy Flashcards
What is Gross Domestic Product (GDP)?
The total value of all final goods and services produced in an economy during a given period, usually a year
What is aggregate expenditure?
The total flow of funds into the market for goods and services - the sum of consumer spending, investment spending, government purchasing of goods and services, and exports minus imports
How is GDP calculated?
GDP = C + I + G + (X-M)
What are the three ways of calculating GDP?
1) The value added approach: adding up total value of all final goods and services produced. 2) The expenditure approach: adding up total spending on all domestically produced goods and services. 3) The income approach: adding up total factor income earned by households from firms in the economy. All add up to the same amount.
What is real GDP?
The total value of all final goods and services produced in an economy during a given period, usually a year, calculated as if prices had stayed constant at the level of some given base year
Why are measures like GDP and price indexes important?
1) They plan an important role in formulating economic policy since policymakers need to know what’s going on in the economy and 2) They are important for business decisions b/c corporations and other players seek independent estimates when they don’t trust official numbers
What is the relationship between a country’s accounts and its economic state?
The more reliable the accounts, the more economically advanced the country is
What are national income and product accounts (national accounts)?
A method of tracking of the spending of consumers, the sales of producers, business investment spending, government purchases, and a variety of other flows of funds between different sectors of the economy
What is the “real” economy?
Flows of funds associated with the production and sale of goods and services
What economic sectors are connected through the circular flow of funds?
Government, households, firms, and the rest of the world via three types of markets: markets for goods and services, factor markets, and financial markets
What is consumer spending (consumption)?
Households engage in consumer spending by purchasing goods and services through the market for goods and services
What are government purchases?
Total purchases by federal, provincial, and municipal governments on goods and services
What is investment spending?
Spending on productive physical capital - such as machinery or construction buildings - and on changes to inventories
What are exports?
Goods and services sold to other countries
What are imports?
Goods and services purchased from other countries
What are final goods and services?
Goods and services sold to the final, or end, user
What are intermediate goods and services?
Goods and services - bought from one firm by another firm - that are inputs for production of final goods and services
What is value added?
(of a producer) the value of a producer’s sales minus the value of its purchases of intermediate goods and services
What is the difference between intermediate goods and services and capital investment?
Intermediate goods and services are used in production, whereas capital investment (i.e. machinery) will last for a number of years and it’s closely tied to current production
What are factor incomes?
Factor incomes consist of the income earned by factors of production, or inputs (i.e. worker wages, rent earned by leasing to firms, etc.)
What are non-factor payments?
Non-factor payments consist of the income earned by the federal government as a result of the production of goods and services. They are the difference between the prices paid for final goods and services and the amount received by factors of production, which include net indirect taxes and capital depreciation (i.e. sales tax, factory equipment wearing out, etc.)
What are net exports?
The difference between the value of exports and the value of imports (X-M)
What does GDP measure?
The size of the economy
What is aggregate output?
The total quantity of final goods and services the economy produces
Why do we track real GDP?
By tracking real GDP over time, we avoid the problem of changes in prices distorting the value of changes in production of goods and services over time
How do you calculate real GDP for a given year?
(Year 2 Quantity1 * Base Year Prices1) + (Year 2 Quantity2 * Base Year Prices2) + … (Year 2 QuantityN * Base Year PricesN)
How do you calculate change in real GDP?
((Real GDP2 - Real GDP1)/Real GDP1)*100
What is nominal GDP?
The value of all final goods and services produced in the economy during a given period, usually a year, calculated using the prices current in the year in which the output is produced
What are chained dollars?
A method of calculating real GDP that splits the difference between growth rates calculated using early base years and the growth rate calculated using a later base year
What are the steps of calculating chained dollars?
Step 1 The first step is to calculate real GDP of adjacent years at the prices of both years
Step 2 Treat, in turn, each adjacent year as the base year, to calculate the percentage change in the values of production; take the average of the two growth rates
Step 3 Choose a base year and calculate its nominal GDP
Step 4 Calculate the real GDP for all other years based on the growth rates calculated in step 2
What are the formulas for calculating chained dollars for 3 consecutive years?
- Real GDP Y1, Real GDP Y2…Real GDP YN (Y1 Base Year)
- Change in growth rate (Y1 Base Year) = ((Y2GDP - Y1GDP)/Y1GDP)*100
- Real GDP Y1, Real GDP Y2…Real GDP YN (Y2 Base Year)
- Change in growth rate (Y2 Base Year) = ((Y2GDP - Y1GDP)/Y1GDP)*100
- AVG Growth Rate1 = (CGRY2 + CGRY1)/2
- Change in growth rate (Y2 Base Year) = ((YNGDP - Y2GDP)/Y2GDP)*100
- Real GDP Y1, Real GDP Y2…Real GDP YN (YN Base Year)
- Change in growth rate (YN Base Year) = ((YNGDP - Y2GDP)/Y2GDP)*100
- AVG Growth Rate2 = (CGRY2 + CGRYN)/2
- Chained GDP Y1 = Real GDP Y1
- Chained GDP Y2 = Real GDP Y1*(1 + AVG Growth Rate1)
- Chained GDP YN = Chained GDP Y2*(1+AVG Growth Rate2)
How do you calculate CPI?
CPI = (Cost of (FIXED) market basket in a given year/Cost of (FIXED) market basket in a base year)*100
What is GDP per capita?
GDP divided by the size of the population, equivalent to the average GDP per person
How do you calculate GDP per capita?
GDP per capita = GDP/population
Why is GDP per capita not a sufficient measure of human welfare in a country?
Because your income might be higher, but whether you use that higher income to improve your quality of life is your choice
What does Real GDP per capita measure?
An economy’s average aggregate output per person
What is the aggregate price level?
A single number representing the overall level of prices
What is a market basket?
A hypothetical consumption bundle, used to measure changes in the overall price level
Why do quantities stay the same when comparing price level changes to market baskets between two years?
Because the quantities of things the average household needs does not change, and we need to create a method to directly compare the changes in prices from one given year to another
What is the inflation rate?
The annual percentage change in an official price index
How do you calculate the inflation rate?
Inflation rate = ((Price Index Year 2 - Price Index Year 1)/Price Index Year 1) * 100
What is the CPI?
The CPI is the Consumer Price Index, a measure of prices; calculated by surveying market prices for a market basket intended to represent the consumption of a typical Canadian urban family
What is the PPI or IPPI?
The PPI or IPPI is the (Industrial) Producer Price Index, which is a measure of the cost of a typical basket of goods and services purchased by producers. Because these commodity prices respond quickly to changes in demand, the IPPI is often regarded as a leading indicator of changes in the inflation rate
What is the GDP Deflator?
The GDP Deflator is a price measure for a given year that is equal to 100 times the ratio of nominal GDP to real GDP in that year
How do you calculate the GDP Deflator?
GDP Deflator = (Nominal GDP for a given year/Real GDP for a given year) * 100
What are the three ways to measure inflation rates? What is the relationship between them?
The three ways are: Consumer Price Index, Producer Price Index, and GDP Deflator. The relationship between them is that they usually move closely together, although the PPI tends to fluctuate more than the other two
Why does the CPI impact millions of people’s lives?
The reason is that many payments (such as pension or old age payments) are tied, or indexed, to the CPI - the amount paid rises or falls when the CPI rises or falls
Why was GDP invented?
When the Great Depression hit, nobody knew how bad the economic situation was in other countries
What does GDP measurement allow economists to do?
1) Compare standards of living over time and 2) compare the difference in standard of living between two economies
What is a flow variable?
It has a time dimension, X per unit of time
What is a stock variable?
Measured at a point in time
What are some examples of flow variables?
GDP, investment, demand, income, etc.
What are some examples of stock variables?
Capital, population, inventory, money in circulation, etc.
What is the income approach GDP calculation?
GDP = Wages + Interest + Rent + Dividends + Non-Factor Payments (i.e. indirect tax and capital depreciation)
What is the value added approach GDP calculation?
GDP = Value of firms sales - spending on intermediate goods and services
What is the income approach as done by Stats Canada?
GDP = Compensation of employees + gross operating surplus + gross mixed income + (taxes - subsidies)
Why do we measure inflation?
To compare income to cost of living and to measure the health of the economy
